Taken together, these judgments highlight the need for parties to consider carefully their compliance position, as well as their contractual drafting, in light of increased sanctions risks globally.
Background
On 27 January 2023, in PJSC National Bank Trust & Anor v Mints & Ors [2023] EWHC 118 (Comm), the High Court handed down a detailed judgment considering various sanctions issues in the context of the UK’s post-Brexit sanctions regime against Russia. Although the decision primarily addressed the effect of sanctions on litigation involving UK asset freeze targets, Mrs Justice Cockerill also provided commentary on when an entity is considered “owned” or “controlled” by an asset freeze target.
The litigation in question commenced in June 2019 and concerned claims made by two Russian banks, PJSC National Bank Trust (NBT) and PJSC Bank Otkritie Financial Corporation (Otkritie) (the Claimants), for some USD850 million from Otkritie’s former co-founder, Boris Mints, and his sons (among others) (the Defendants).
The Claimants alleged that the Defendants conspired with representatives of the Claimants to enter into uncommercial transactions with companies connected to the Defendants in which loans were replaced by worthless or near-worthless bonds. In 2019, the Claimants obtained worldwide freezing orders, which were later replaced by undertakings by certain of the Defendants (accompanied by a cross-undertaking in damages to the court).
On 29 February 2022, Otkritie was targeted by a UK asset freeze under the Russia (Sanctions) (EU Exit) Regulations 2019 (the UK Regulations). As a result, UK persons are prohibited from:
- dealing with funds or economic resources owned, held or controlled by Otkritie; and/or
- making funds or economic resources available to or for the benefit of Otkritie.
The Defendants sought a stay of proceedings and a release from the undertakings against them, arguing that the entry into any court judgment for the Claimants on the causes of actions they were advancing would be unlawful under the asset freeze. They further argued that various stages of the court proceedings could not be completed without a license (and that there were no relevant licensing grounds).
The Defendants also argued that NBT was subject to an asset freeze because NBT, although not designated in its own right, was “owned or controlled” by at least two designated persons, being President Putin and Ms Elvira Nabiullina (the governor of the Central Bank of Russia, of which NBT is a 99%-owned subsidiary).
The effect of sanctions on litigation proceedings
Turning to the central sanctions issue, the judge agreed with the Defendants that a cause of action is an “economic resource” on the basis that it can be used to obtain funds or financial assets and goods and services. A judgment debt is, on its face, a “fund” as it represents an obligation owed by a judgment debtor to pay a sum of money.
However, the judge ultimately concluded that, despite the breadth of the legislative wording, the entry of a judgment is not caught by the restriction on dealing/making available. In reaching this decision, the judge held that the Defendants had not demonstrated the requisite level of clarity in the legislator’s intent to derogate from the fundamental right of access to the court.
In response to the Defendants’ argument that the Office of Financial Sanctions Implementation (OFSI) is not empowered to license the entry of judgment in favour of designated persons, the judge concluded that this is because such a license was unnecessary.
The judge held that OFSI does have the power, however, to license the remaining acts, which would otherwise infringe the asset freeze, being:
- the payment of an adverse costs order;
- the payment of security for costs for the purpose of meeting such adverse costs order; and
- the payment of any damages pursuant to a cross-undertaking made to the court.
Is NBT owned or controlled by a designated person?
UK asset freezes apply not only to those expressly designated but also to entities owned or controlled by a designated person. Although not determinative as the judge had held that an asset freeze would not prohibit the entry of a judgment, the judge nonetheless briefly considered whether NBT is controlled by President Putin and Ms Nabiullina by virtue of their respective offices (and would therefore be considered indirectly targeted by an asset freeze).
On this question, the judge again ruled in favour of the Claimants – who had argued that the UK Regulations should not be interpreted as covering control by reason of office or employment – and concluded that NBT is not so controlled. In reaching this decision, the judge observed that the sanctions were not drafted to take aim directly at the Russian State and its entities, but rather are primarily directed at the personal level and at specific entities.
To this end, the judge noted that the UK Government’s stated aim is to look to designate owned and controlled entities/individuals in their own right wherever possible. Accordingly, it was considered implausible that the UK Government would intend for major entities to be “sanctioned by a sidewind” in situations where they would have no notice and where other major entities have been sanctioned separately by name.
Conclusion
Accordingly, the Defendants’ applications were dismissed and the litigation proceedings were able to continue. Due to the important sanctions issues raised, with wide implications for litigation involving sanctioned entities, the judge granted permission to appeal.
Vessel financing judgments
The High Court has also given two recent judgments regarding vessels financed by the Russian transport ministry in Havila Kystruten AS & Ors v STLC Europe Twenty-Three Leasing Ltd & Anor [2022] EWHC 3166 (Comm) and Gravelor Shipping Limited v GTLK Asia M5 Limited [2023] EWHC 131 (Comm). These judgments both related to transactions entered into with subsidiaries of JSC GTLK, a Russian state-owned entity, which was designated as an asset freeze target under EU sanctions on 8 April 2022 (and targeted by a UK asset freeze also in April 2022 and U.S. blocking sanctions in September 2022).
No doubt these judgments are representative of many such claims that will arise from the enhanced sanctions on Russia imposed since its invasion of Ukraine, demonstrating the care which parties should take when contracting with entities associated with higher-risk jurisdictions.
Should you have any questions on the matters discussed in this article, please contact Matthew Townsend or your usual contact at Allen & Overy LLP.
